Ronald S. Gass
Reinsurance and Insurance Arbitrator and Umpire
Reinsurance and Insurance Dispute Resolution Services Consultant

"Follow the Settlements" Clause Held Not Implicit in a Fac Cert as a Matter of Law

An Ohio federal district court ruled that a "follow the settlements" clause may not be read into a facultative certificate as a matter of law and, hence, partial summary judgment was inappropriate because genuine issues of material fact existed in light of conflicting expert opinions regarding reinsurance industry custom and practice on this issue.

In 1974, Employers Re issued a multi-year facultative certificate, without an express "follow the settlements" clause, to North River covering liability policies issued to Owens-Corning Fiberglas Corp. In 2000, North River settled certain non-product asbestos claims arising from the insured's installation of its asbestos products and sought $15,331,526 in indemnity and $6,349,327 in defense costs from its reinsurer under its fac cert. In response to North River's breach of contract action, Employers Re counterclaimed for declaratory judgment contesting its liability for the Owens-Corning settlement on a variety of grounds. Both parties sought partial summary judgment on the question of whether the "follow the settlements" doctrine could be read into the fac cert in the absence of express language to that effect.

Confronted with diametrically opposed reinsurance expert opinions about whether the "follow the settlements" doctrine was or was not inherent in every fac cert and applying New Jersey law, the court first rejected the cedent's arguments that certain fac cert provisions were tantamount to a "follow the settlements" clause (e.g., the cert's definition of loss and claim expenses, the indemnification clause, and the reinsurer's right to associate clause). After concluding that New Jersey law permitted it to ascertain the intent of the parties based on extrinsic evidence, even in the absence of ambiguity in the contract language, the court found that conflicting industry expert opinions on this issue created the existence of genuine issues of fact that precluded a partial summary judgment award to either party on this issue.

North River Insurance Co. v. Employers Reinsurance Corp., Case No. CV-2-00-1221, 2002 U.S. Dist. LEXIS 7118 (S.D. Ohio Mar. 11, 2002).


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